[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)] [Unknown Section] [Page 0] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 94-1674] [[Page Unknown]] [Federal Register: January 27, 1994] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-33490; File No. SR-CHX-93-17] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Amending Its Rules Relating to Suspension of Registration of Specialists, Odd-Lot Dealers and Market Makers January 19, 1994. I. Introduction On July 28, 1993, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') submitted to the Securities and Exchange Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the suspension of registration provisions for specialists, odd-lot dealers, and market makers. On August 19, 1993, the CHX submitted to the Commission Amendment No. 1 to the proposal.\3\ --------------------------------------------------------------------------- \1\15 U.S.C. 78s(b)(1) (1988). \2\17 CFR 240.19b-4 (1991). \3\See letter from David T. Rusoff, Attorney, Foley & Lardner, to Cheryl Dunfee, Attorney, Exchange Branch, Division of Market Regulation, Commission, dated August 18, 1993. Amendment No. 1 made certain clarifying changes to the proposal. --------------------------------------------------------------------------- The proposed rule change was published for comment in Securities Exchange Act Release 32888 (September 14, 1993), 58 FR 49341 (September 22, 1993). No comments were received on the proposal. This order approves the proposal. II. Description of the Proposal The CHX proposes to amend four Exchange Rules\4\ thereby making two primary changes to the rules governing summary suspension of the registration of specialists, odd-lot dealers and market makers. The Exchange proposes to add market makers to the list of members who may have their registration summarily suspended, and it proposes to limit the authority to summarily suspend the registration of specialists, odd-lot dealers and market makers to the President of the Exchange. --------------------------------------------------------------------------- \4\The CHX proposes to amend Article XXX, Termination of Registration, Rule 8; Article XXXI, Termination of Registration, Rule 14; Article XXXIV, Registration and Application, Rule 13, Interpretations and Policies .02; and Article XXXIV, Suspension and Termination, Rule 16. --------------------------------------------------------------------------- Currently, unlike the case of specialists and odd-lot dealers, there is no authority to summarily suspend the registration of a market maker. Current Exchange Rules dealing with market maker registration only provide for the termination or suspension of a market maker pursuant to Article XVII by the Floor Procedure Committee (or other committee appointed for the purpose by the Board) upon a finding of unsatisfactory performance.\5\ The current provisions provide for an initial meeting with Exchange Officials to encourage and assist the market maker, and for a hearing prior to the termination of the market maker's registration. --------------------------------------------------------------------------- \5\The registration of a market maker may be terminated, pursuant to Article XXXIV Registration and Application, Rule 16, upon a finding that he violated the Constitution or Rules of the Exchange or failed adequately to fulfill his responsibilities as a registered market maker. See also, Article XXXIV, Rule 13, Interpretations and Policies .02 which provides that the registration of a market maker may be suspended or terminated by the Equity Floor Procedure Committee in accordance with the provisions of Article XVII. --------------------------------------------------------------------------- The Exchange is replacing the current provisions governing the suspension of market maker registration with new summary procedures for the termination of market maker registration.\6\ These new summary procedures provide that whenever it appears to, or is called to the attention of, the President of the Exchange that a registered market maker is violating any of the Rules of the Exchange or the federal securities laws or is conducting market maker business in an unethical manner, the President shall, without the necessity of previous notice, suspend the registration of such market maker pending the opportunity for a prompt hearing on the apparent violation in accordance with Article XII of the Rules of the Exchange. The procedures further provide that notwithstanding the opportunity for a hearing, upon imposition of the summary suspension of registration, the Exchange shall provide notification thereof to the Commission. The affected market maker\7\ may immediately file a request with the Commission for a stay of imposition of the suspension of registration.\8\ The proposed rule concludes by stating that the Floor Procedure Committee may suspend or terminate any such registration based upon a finding, after an opportunity for a hearing, in accordance with Article XVII, that the market maker has not satisfactorily performed his responsibilities as defined in the federal securities laws and the rules and policies of the Exchange. --------------------------------------------------------------------------- \6\In this regard, the Exchange proposes to eliminate the language in Article XXXIV, Rule 13, Interpretation .02, and Article XXXIV, Rule 16 and replace it with new summary procedures to be described in Article XXXIV, Rule 16. \7\In Amendment No. 1, the CHX replaced ``the affected odd lot dealer'' with ``the affected market maker.'' See footnote 3. \8\The proposed rule text provides that this may be done in accordance with such procedures as the Commission may provide. --------------------------------------------------------------------------- The Exchange states that these changes to the provisions governing the suspension and termination of market maker registration will serve to conform the market maker registration suspension and termination provisions to those of the specialist and odd-lot dealer. The proposed rule change also changes current Exchange Rules governing the summary suspension of the registration of specialists and odd-lot dealers. Currently, the rules allow for summary suspension by either the Floor Procedure Committee or the President of the Exchange. Such Rules specify that whenever it shall appear or be called to the attention of any member of the Committee on Floor Procedure or the President that a specialist, co-specialist, relief specialist or odd- lot dealer is violating any of the Rules of the Exchange or the federal securities laws or is conducting business in an unethical manner, the member of the Floor Procedure Committee or the President shall, without the necessity of previous notice, suspend the registration of such party pending an opportunity for prompt hearing on the apparent violation in accordance with Article XII of the Rules of the Exchange.\9\ --------------------------------------------------------------------------- \9\Article XXX, Termination of Registration, Rule 8 governs specialists, co-specialists and relief specialists, and Article XXXI, Termination of Registration, Rule 14 governs odd-lot dealers. Both Rule 8 and Rule 14 also provide that, notwithstanding the opportunity for hearing, upon imposition of the summary suspension of registration, the Exchange shall provide notification thereof to the Commission and the affected party may immediately file a request with the Commission for a stay of imposition of the suspension of registration in accordance with such procedures as the Commission may provide. Both Rules 8 and 14 further provide that the Committee on Specialist Assignment may suspend or terminate any such registration based upon a finding (after the opportunity for a hearing in accordance with Article XVII) that the party has not satisfactorily performed his responsibilities as defined in the federal securities laws and the rules of the exchange. --------------------------------------------------------------------------- The Exchange is eliminating the language in the suspension of registration rules governing specialists, co-specialists, relief specialists and odd-lot dealers which provides that any member of the Floor Procedure Committee may take action to summarily suspend the registration of such parties. The amended rule, therefore, permits only the President of the Exchange to summarily suspend the registration of specialists, co-specialists, relief specialists and odd-lot dealers. This corresponds to the new market maker summary suspension provisions previously discussed. The Exchange believes that due to the serious nature of summary suspension of registration, this type of authority is appropriately exercised only by the President of the Exchange. III. Discussion and Conclusion The Commission finds the proposed rule change to be consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with the requirements of sections 6(b) (5), (6) and (7) of the Act.\10\ Section 6(b)(5) of the Act, requires inter alia, that, the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade. The Commission believes that the addition of market makers to the list of persons who may have their registration summarily suspended will help to prevent fraudulent and manipulative acts by allowing the Exchange to take immediate action against a market maker who is acting unethically or in violation of Exchange rules or federal securities laws or regulations. --------------------------------------------------------------------------- \10\15 U.S.C. 78f(b) (5), (6) and (7) (1988). --------------------------------------------------------------------------- Section 6(b)(6) of the Act provides that the rules of the Exchange should provide that exchange members and persons associated with its members be appropriately disciplined for violation of the provisions of the Act or rules and regulations thereunder or the rules of the exchange by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction. The Commission believes that the summary suspension of market maker registration is an appropriate disciplinary action in cases where the market maker has acted unethically, violated Exchange Rules or the federal securities laws, since specialists and odd-lot dealers are already subject to such action and there is no reason to distinguish among the three groups. In addition, recent experience has shown the Exchange that summary suspension authority is needed for market makers as well as for other exchange members. Section 6(b)(7) of the Act provides, inter alia, that the rules of an exchange must provide a fair procedure for the disciplining of members and persons associated with members. The Commission believes that it is fair to limit the power to summarily suspend member registration to the Exchange President. The Commission agrees that, due to the serious nature of summary suspension, it is appropriate to limit summary suspension ability to a senior Exchange official. The rules also provide adequate due process to persons summarily suspended by providing the opportunity for a prompt hearing on the matter and the ability to appeal any action taken to the Commission.\11\ --------------------------------------------------------------------------- \11\See note 8 and accompanying text. --------------------------------------------------------------------------- It is therefore ordered, pursuant to section 19(b)(2)\12\ of the Act, that the proposed rule change (SR-CHX-93-17) be, and hereby is approved. \12\15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\13\ --------------------------------------------------------------------------- \13\17 CFR 200.30-3(a)(12) (1992). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-1674 Filed 1-26-94; 8:45 am] BILLING CODE 8010-01-M